Osborne set for hardest Budget in a generation

The Chancellor, George Osborne, is expected to deliver on Tuesday one of the harshest Budgets in decades, as he attempts to grapple with the bloated public-sector debt legacy left by Labour.

Sources close to Mr Osborne said this week's emergency Budget had been finalised by Friday, breaking with the tradition of last-minute tinkering under Gordon Brown.

Sir Alan Budd, head of the newly formed Office for Budget Responsibility, is this weekend poring over an advance copy of Tuesday's report, dubbed by the City as the most important Budget in more than 30 years.

Forecasts outlined by Sir Alan last week mean that the coalition will have to usher in tightening measures, such as tax increases or public spending cuts, worth at least £24bn a year until the end of the 2015 parliamentary term.

Mr Osborne is unlikely to be deterred from making deep cuts following better-than-expected borrowing figures from the Office for National Statistics last Friday. The public sector borrowed £16bn in May this year – £1.4bn less than the same time in 2009. The improved number was in part down to the levying of a bankers' bonus tax earlier in the spring.

On Tuesday, a raft of measures intended to plug the shortfall in the public purse are likely to be announced with many predicting a hike in VAT, the first major increase to the tax since the Tory government of 1991 increased it from 15 to 17.5 per cent.

A predicted increase to 20 per cent, would generate an extra £12bn each year – equivalent to a 3 per cent increase in the rate of income tax – analysts in the City have estimated.

"Credibility will be a key issue," warned Hetal Mehta, adviser to the Ernst & Young Item Club. "Any hint that there is a lack of conviction in tackling the huge deficit will undermine market confidence and make it even more difficult to consolidate fiscal policy in the years ahead. Credit ratings agencies have so far been patient, but this is a test that the Government cannot afford to fail."

A move to raise VAT is likely to stoke anger in those in the retail sector, even if it is delayed for a year as some have predicted. Last week, Sainsbury's chief executive, Justin King, said of a potential hike: "A VAT change will be felt like inflation and if VAT goes from 17.5 to 20 per cent, that's the equivalent of north of 1 per cent inflation and that's how it will be felt by consumers."

Mr Osborne has already announced a range of cuts worth more than £6bn, while he said last week that the scrapping of a range public sector programmes instigated by Labour would save more than £2bn.

There is speculation that Mr Osborne could raise the rate at which capital gains tax is levied from 18 per cent to 40 or 50 per cent – a sop to his Liberal coalition partner but a move that is likely to go down badly in the City. Last week, the right-wing think tank, the Adam Smith Institute, warned that the adoption of the measure could actually cost the Exchequer as much as £2.5bn in lost receipts.

Ahead of the Budget the traditional lobbying process from a range of bodies was in full flow. The Association of British Insurers urged the Chancellor to enhance Britain's competitiveness or risk seeing more firms quit London for foreign jurisdictions.

"The Government must encourage insurers to stay, as well as make the UK attractive to companies looking to relocate from abroad," warned Kerrie Kelly, the recently installed director general of the ABI. "Having a more transparent and predictable tax system would greatly enhance the UK's competitiveness. Insurance firms are a major source of employment and contributor of corporation tax to the UK Exchequer."

Tuesday's Budget will be the last to use the famous 150=year-old battered briefcase, first used by William Gladstone in 1860. Only Gordon Brown and Jim Callaghan refrained from using the box on Budget day for a more modern equivalent.